The Hon’ble Karnataka High Court in the case of South Indian Oil Corporation v. Assistant Commissioner of Central Tax & Ors. [WP No. 22068 of 2024, order dated December 12, 2025] held that refund of accumulated Input Tax Credit under Section 54(3)(ii) of the CGST Act cannot be denied merely because input and output supplies are the same or taxed at the same rate, and that reliance on Circular No. 135/05/2020-GST dated March 31, 2022 to reject refund claims was erroneous.
Facts:
South Indian Oil Corporation (“the Petitioner”) was engaged in the business of procuring edible oils such as sunflower oil, rice bran oil, cottonseed oil and palm oil, purchasing them in bulk and packing them into smaller units for sale, and filed refund applications for accumulated ITC arising on account of inverted duty structure.
The Assistant Commissioner of Central Tax & Ors. (“the Respondent”) issued show cause notices and rejected the refund applications on the ground that the input and output supplies were the same and taxed at the same rate, relying upon Circular No. 135/05/2020-GST dated March 31, 2020, and the appellate authority upheld such rejection.
The Petitioner contended that Section 54(3)(ii) does not restrict refund where input and output supplies are the same, that the statute does not contemplate comparison of principal input and output tax rates, and that Circular No. 173/05/2022-GST dated July 6, 2022 removed the restriction contained in Circular No. 135/05/2020-GST and operates retrospectively.
The Respondent contended that refund was not admissible because bulk and bottled products were the same goods taxed at the same rate, and therefore the case was not one of inverted duty structure within the meaning of Section 54(3)(ii).
Aggrieved by the rejection of refund claims and appellate orders, the Petitioner approached the High Court by way of writ petition, seeking quashing of impugned orders and directions for refund.
Issue:
Whether refund of accumulated ITC under Section 54(3)(ii) of the CGST Act can be denied on the ground that input and output supplies are the same or taxed at the same rate, and whether reliance on Circular No. 135/05/2020-GST to deny such refund is valid?
Held:
The Hon’ble Karnataka High Court in WP No. 22068 of 2024 held as under:
- Observed that, Section 54(3)(ii) of the CGST Act does not proscribe or forbid the grant of refund where the input and the output are the same, and the provision does not contemplate comparing the rate of tax on the principal input with the rate of tax on the principal output supply.
- Noted that, Circular No. 135/05/2020-GST dated March 31, 2020 relied upon by the authorities was inapplicable, and circulars cannot curtail statutory entitlement, particularly when subsequent Circular No. 173/05/2022-GST dated July 6, 2022 removed the restrictive portion and clarified eligibility of refund.
- Observed that, CBIC circulars issued under Section 168 can only ensure uniform implementation and cannot add to or curtail the provisions of the statute.
- Noted that, where ITC has accumulated because inputs other than the principal product attracted higher tax, denial of refund merely because certain inputs or outputs carried the same rate is unsustainable.
- Observed that, interest on refund is statutory and automatically payable after expiry of 60 days from the date of application in terms of Section 56 of the CGST Act.
- Held that, the impugned orders rejecting refund claims were illegal and liable to be set aside, and the Respondents were directed to grant refund together with applicable interest within the stipulated time.
Our Comments:
The Court relied upon Indian Oil Corporation Ltd. v. Commissioner of CGST [2023 (13) Centax 228 (Del)], where the Delhi High Court held that Section 54(3)(ii) does not require comparison of principal input and output tax rates and that refund cannot be denied merely because input and output supplies are the same. The reasoning adopted in that case was followed and applied to the facts of the present case, and the Court expressly held that there is neither reason nor scope to confine refund only to cases where the rate on the main input is higher than the rate on the principal output.
The Court also relied upon Baker Hughes Asia Pacific Ltd. v. Union of India [2022 (140) Taxmann.com 326 (Raj)] and Shivaco Associates v. Joint Commissioner of State Tax [2022 (59) GSTL 389 (Cal)], where it was held that refund of accumulated ITC arising from inverted duty structure cannot be denied merely because input and output supplies are the same. These decisions were treated as supporting authorities that aligned with the statutory interpretation adopted in the present case.
Interest on delayed refund was considered in light of Ranbaxy Laboratories Ltd. v. Union of India [2012 (27) STR 193 (SC]) and subsequent High Court decisions such as Raghav Ventures v. Commissioner of Delhi, GST [2024 (16) Cen 69 (Del)] which held that interest on refund is automatic once statutory conditions are met; the Court adopted the same principle.
Relevant Provisions:
Section 54 of the CGST Act
“54. Refund of tax-
(1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed…”
Circular No. 135/05/2020-GST dated March 31, 2020
“3. Refund of accumulated input tax credit (ITC) on account of reduction in GST Rate
3.1 It has been brought to the notice of the Board that some of the applicants are seeking refund of unutilized ITC on account of inverted duty structure where the inversion is due to change in the GST rate on the same goods. This can be explained through an illustration. An applicant trading in goods has purchased, say goods “X” attracting 18% GST. However, subsequently, the rate of GST on “X” has been reduced to, say 12%. It is being claimed that accumulation of ITC in such a case is also covered as accumulation on account of inverted duty structure and such applicants have sought refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act.
3.2 It may be noted that refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act. It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.
..”
Circular No. 173/05/2022-GST dated July 06, 2022
“2. Vide para 3.2 of Circular No. 135/05/2020-GST dated 31.03.2020, it was clarified that refund on account of inverted duty structure would not be admissible in cases where the input and output supply are same. Para 3.2 of Circular No. 135/05/2020-GST dated 31.03.2020 is reproduced, as under: “Refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act. It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.
…”
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